Times are tough, profits are hard won and the temptation to win consumer wallets is to start discounting. This can be especially attractive if the business is focused on goods that have done well in the past, but are suffering today as consumers tighten their belts. These types of goods often include big ticket items like cars, household furniture, TVs, phones or laptops, but they certainly aren’t limited to slow moving goods categories, they could equally apply to anything that’s considered a luxury item, whether that’s food stuffs, toiletries or other items.
It is basic business sense that if people aren’t buying what you have to sell, the job is to make the product more attractive. Reducing price might seem like a good move, and it can work. But it isn’t the only way to attract a customer’s attention, and it is far from the best tactic.
Price cutting is a helter-skelter
When a retailer sets the price of goods it takes a lot of things into account, but at the heart of the calculation is maximising profit against what the market will bear. While price reduction might create a small bump in profit for a period, it can be dangerous in several ways.
In terms of the individual business, that small bump in profit doesn’t necessarily carry through to the end of the financial year. Rising costs in areas like manufacturing, distribution, storage, and any power and heating bills, as well as labour costs can wipe that profit bump out. Reducing profit while costs rise could be a recipe for insolvency.
Price cutting can have ramifications for the wider sector too. If a rival firm sees you doing well through price cutting, they might follow suit. Pretty soon the price for particular goods might be standardised across key retailers at a lower rate. Then what do you do? Cut again? How far down this spiral can any business go before it can’t go any further? When profit margins fall, the ability to invest, increase advertising, launch new products and more can all suffer. The slippery slope is a bit like a fairground helter-skelter. Once you are on it, going back is a real challenge.
The effect on brand image
Customers are highly focused on price, but that’s not all they care about. Quality is also really important to them. The rise and rise of cut-price supermarkets has shown that when a retailer can sell for lower prices and maintain high quality, customers looking to save but not drop their standards will move allegiance. But there is another side to this coin. Some food brands are highly prized, and people will pay more for them because of brand, not necessary because of superior quality.
So how does price cutting affect brand reputation? In the US, Tesla car prices have been cut several times this year, with apparently a positive effect on both brand reputation and sales. Tesla owner Elon Musk said “We found that even small changes in the price have a big effect on demand, very big.”. But Tesla is a rich company, and it has a huge economy of scale when it comes to vehicle production. It has also said it is in the business of cutting the cost of its next generation vehicles in half. So cost cutting is part of a wider and well publicised strategy.
For most businesses, the situation is different. Price and brand value are intertwined, and customers need to trust that the price of a good has been set fairly. If you look at a range of basic commodities like TVs, laptop computers, fridges, cars, you’ll see similarly specified goods at a range of prices within a narrow band, with maybe an outlier or two at the value and premium ends. Brand matters at all points along the spectrum.
So, if one brand cuts prices, it might make sales. But when it decides to raise prices again, consumers may respond with a raised eyebrow, and question the change: Why has the price risen? Does the company need to increase profit? Is it in trouble? If it fails what happens to my after-sales service? Or is it just profiteering?
Differentiation and profitability through promotions
If discounting is a poor option for most businesses, what can they do when times get tough? The answer is get a promotions strategy in place. Targeted promotions, which offer the customer a focused additional benefit alongside the goods they want, can be hugely effective.
That TV purchase which has been put off for a year but now comes with a free streaming subscription might be very appealing. The new sofa that includes a heavy cashback on the old one, plus its removal to a charity or recycling facility might be enough to seal the deal. The dishwasher that comes bundled with a hefty supply of dishwasher tablets could win the day.
Promotions like these don’t reduce margins for the retailer, and they can be managed in a highly sophisticated way – time specific, customer targeted, and with third party suppliers who are only too happy to include their goods with yours.
Partnering with a company whose entire business model is based on running promotions, from goods sourcing to campaign management and fulfilment, can ensure a retailer maintains profitability and offers customers truly differentiating value.
Forget the race to the bottom that is discounting. Join the race to the top that is brand value enhancement through promotions.